Get Rich or Die Tryin'
October 27, 2008 5:16 PM   Subscribe

Financial advice-filter. I'm a college student with no debt and negligible living expenses. Where should I be putting my income?

I'm a college student who is lucky enough to have parents footing the entire bill for college, hence I have no student loan debt. I'm also living at home and not paying rent or for groceries, or for anything except incidentals, really. I know how incredibly fortunate this situation makes me, and I want to do everything I possibly can to ensure that I am financially independent from my parents as quickly as possible, while understanding where to invest my money and why.

I have a part time job where I take home between $220 and $300 a week after taxes. Right now it's going directly into my online savings account, which currently has an APY of 3%. I have about 5k socked away in this account. I also have a Roth IRA and an investment portfolio (mutual funds, etc.) that is managed by a financial advisor and about which I know very very little.

My financial goals are manifold; I would like to own a home within the next 10 years and I'd like to save prudently for retirement. I also have a pipe dream of opening a small business.

That said, where should I be putting my money right now? I'm young so I'm not risk-averse, but I also have some short term financial goals like owning a home and opening a business. I was planning on maximizing my contribution to my Roth ($5,000 for this year), but that would leave me with very little left over to put into my portfolio, which I'm told (by Warren Buffett, among others) is a good idea right now since the market is so depressed and I have a long time to make my money back. (Buy low, sell high and all that.)

Or...should I make sure I have a decent emergency cash fund before I think about doing any of these things? I plan on graduating college in 2010 and there's no guarantee in this economy that I'll be able to line up a job right away, so it'd be nice to know that I could still pay 6 months' rent someplace. Or should I open a CD or a money market account to save specifically for my short-term goals at a higher return than my savings account?

Clearly I already have some money put away in various places but I would really like to start taking more responsibility for my own finances. Additionally, any recommendations for good places for young investors to learn about managing their own money, along the lines of the Motley Fool or Get Rich Slowly? I've also read Suze Orman's book geared toward young people but that was mostly about getting out of debt (which I am not in) and advice that might have changed based on the conditions of the economy right now.

(Anonymous because I'm not too comfortable talking specifics about money publicly.)
posted by anonymous to Work & Money (8 answers total) 9 users marked this as a favorite
Your Roth and your portfolio aren't mutually exclusive. You can put money into the Roth and then invest it in the stock market just like Mr. Buffet says! (That's probably what you ought to do, in my opinion.)

I am not really a fan of CDs because it's easy to forget not to renew them and then your money is all locked up for another however many years and their rates aren't really that much better than high-yield online savings accounts, but that's just me.
posted by phoenixy at 5:32 PM on October 27, 2008

Let's assume you are the picture of young financial responsibility first. If I was you, I'd keep the money in a savings account until I had like 15k minimum, maybe 20. Who knows, when you graduate, you might want to move to NY or SF, and that can cost you 10k right there easily. Even if you have a job that covers your living expenses, broker fee/security/first-month on your apartment adds up quick, and that ignores moving and living till you get your first paycheck, plus, you'd like to have a savings cushion going in to that job. After that, most people would tell you to max out your Roth and stick that in the lowest expense ratio broad-based US index fund you can find. Doing both of those will consume all the money you are talking about unless you get a huge raise. The types of investment options you are talking about are for people with a much longer time horizon. Its entirely possible that you will hit some very big but reasonable expenses in the near future and have a legitimate reason to spend some of this money, so keep it in something liquid with no market risk: cash.

If you want to start a business of any kind, don't put the money in your roth. Keep it all in savings. Don't put it in the markets either. Just keep piling up cash. Then, at the very least, you can spend the money on the business. You can cover living expenses while trying to raise more capital, figure out the b-plan, market, etc. Being straight out of school with enough cash in the bank to cover yourself for a while is a great spot to be in for starting a business.

Now, leaving the financial responsibility bit aside for a second: you are going to graduate school with no debt. You may even have a nice chunk of change in the bank. You'll have no mortgage and what sounds like no real responsibility. It could conceivably be one of the worst job markets in living memory. It could be a once in a lifetime opportunity to do some serious travel/volunteering/crazy-project-doing. I'm sure Suze Orman would argue against this line of thinking, but I bet you move down the road from being straight out of school a few years and you'll prefer having the experience of the six months you spent backpacking through Central Asia to having a few more k in your index fund. And who knows, the market might not even penalize you for it (c.f. Dow returns 1970-1980).
posted by jeb at 6:13 PM on October 27, 2008

It's not at all hard to remember to pull your money out of a CD. You have a computer; it has a calendar program on it that will do that little job for you.

Currently HSBC is offering 4% on 6-month CDs and 3% on savings, so if you want to go with an FDIC-insured account, the short-term CD is looking very attractive. Even for an emergency fund -- in an emergency, you just take the money out of the CD and accept the penalty, which is merely some or all of the interest you would have been paid had you held it to completion. It's a good way to make yourself consider whether you're really in an emergency.

Yes, you should definitely put $5,000 into your Roth and make sure it goes into a mutual fund that's invested in the stock market. By my calculations, you have just enough time to save another $5,000 for the Roth by the April 15, 2009 deadline for contributing for 2008. Then you can start saving up for 2009's contribution, which you should also make as soon as possible so as to buy as much as you can while things are cheap.

You probably already realize this, but the Roth also makes a decent secondary emergency fund, since you can always draw out your contribution without penalty. That doesn't mean you'll want to -- your investments might be down, and selling them to take out the cash might realize a substantial loss. Still, in an actual emergency, it's nice to know that you can do that.
posted by kindall at 6:16 PM on October 27, 2008

I would recommend that you first max out your Roth every year as you have been doing. This is money you aren't going to touch for the next 40 years. I would invest your Roth in the Vanguard Target Retirement 2050 Fund. This fund is about 95% stocks and holds a diversified representation of all the stocks in the world -- domestic, Europe, Asia, Far East and emerging markets -- all in just one fund. It couldn't be simpler or more diversified.

The money you have left over should not be invested in stocks but needs to be in safe, readily available assets such as a savings account, money market fund, or CDs. At this point in your life you don't have a lot of income but you have a lot of unknowns for the near future. Maybe you need a car, eventually need to move into your own apartment or home, want to start a business, maybe go to grad school. So you need to keep the money safe and available. This isn't like the Roth that you know you won't touch for the next 40 years. Stocks are much too risky for money you think you might need to spend in the next 5 years or so.

There will be those that say you should put everything in stocks, it's a great time to buy, etc but resist. Let your Roth hold your stocks for now and keep the rest in cash.

I could be wrong but I say ditch the financial adviser. You don't need him and he is probably robbing you blind by putting you into high fee front-load mutual funds. If it doesn't cost you too much, I would get out of those funds in your portfolio and stick with the safe cash accounts mentioned above.

Once you get a real job and are out on your own you can think again about investing in your taxable portfolio but you don't need to do that now.

The Coffeehouse Investor by Bill Schultheis is a good, quick introduction on how to think about investing. It's cheap and you can read it in a couple of evenings. To dig in a little deeper you could try The Bogleheads' Guide to Investing.
posted by JackFlash at 6:24 PM on October 27, 2008

You don't say how much money is in your investment portfolio or where your portfolio and Roth money are invested. You need to know where all of your money is before you can make an informed decision.

A Roth IRA is like a large bucket that can hold almost any kind of investment. At your age, I would have all the Roth money (including the new contributions) in a mix of stock mutual funds, including some international. Don't spread it too thin - it is silly to have just $1000 here and $1000 there but as you get more money some moderate diversification is good.

A money market account works very much like a bank savings account. I like Vanguard because their expenses are so low. You can find better teaser rates at some of the banks, but I tend to put my money in the account and forget about it. Personally, I had two money market accounts (one regular and one treasury). One was to save up money that I was going to spend - property taxes or a trip to Europe or first months rent, sort of like an emergency account but also used for big, predictable expenses. The other was to save for longer term, multi year projects like a new car or a downpayment on a house. One idea would be split your money after expenses three ways: emergency/annual expenses, savings, Roth. If you max out on the Roth then put that money in with your regular investments. If your emergency/annual account is comfortable large, then split the new money between the other two.

Have you read Andrew Tobias's The Only Investment Guide You Will Ever Need? If not, check it out from the library and see if you find it helpful. It is very basic and practical.
posted by metahawk at 6:25 PM on October 27, 2008

ps. Once you get some confidence, don't use a financial advisor. Keep your investments simple and generic so you can understand them yourself.
posted by metahawk at 6:28 PM on October 27, 2008

I began my investing a few years ago as a grad student, so if I can do it, surely you can too.

There are some very nice properties about Roth IRAs for people like us:
1. Contributions are taxed, but earnings are not. Most students shouldn't have much tax liability, so there's a small win there.
2. Contributions (but not earnings) can be withdrawn without penalty. If you graduate and have trouble finding a job in this economy, you can pull money out painlessly. You can use Roth contribution to pay six rent if need be, I've done it.
3. Up to 10 thousand in earnings can be used for a house if it's been open for at least five years.

Right now is a risky opportunity to invest. It's attractive because stocks are falling and corporate bonds are high yield. But it's hard to time against the market volatility, and we could be in for a long stagnant market. However, you only live once, and the best lessons in life are only learned by doing. If you plan to take out 10k for a house in five to ten years, then your investment horizon isn't as long you'd think for a retirement account, and you may end up with a lot of bonds in your mix -- bonds are boring but relatively reliable.

I'd go ahead and transfer $4,000 in the IRA now and maximize 2008 contributions later. Your living expenses account will need some funding or you risk bouncing checks, low balance penalties etc. Chat with your planner and find out what's in the Roth IRA portfolio and what sorts of investments are appropriate for your plans. They'll probably recommend a lot of bonds, which are a fairly safe investment (recent crisis not withstanding). You may decide to leave the IRA in a money market for a few months while the congressional plans work their course.

As far as your dream of starting a business -- build good credit first, and pursue business loans and partners. Buying a house with the standard downpayment is a smart step towards building credit you'll need later. Student loans are another traditional credit builder, but that's nothing against you. If you own a profitable business, being able to sell it would make a good retirement plan, so don't think of stock market investments and starting a small business as a tradeoff between "retirement" and "dream job". They're just different investments.
posted by pwnguin at 12:24 AM on October 28, 2008

It's great that your parents are both currently willing and able to support you while you complete your education; however, if there is any possibility that your parents will experience financial difficulty (job loss, big health expenses and/or illness leading to early retirement or -- urp -- death, decimated investments that were previously providing substantial income, etc.) then you should be sure to incorporate this into your plan.

If too much of your money is out of reach and your parents are suddenly unable to support you, even for a brief period of time, this could cause you a great deal of trouble with tuition and other time-sensitive expenses that you mightn't be able to put off for long enough.
posted by onshi at 6:36 AM on October 28, 2008

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